Citigroup was cleared of insider trading and conflict of interest charges in Australia today in a closely watched case that examined information leaks between the global investment bank’s trading and advisory divisions.

A Federal Court in Sydney rejected allegations from Australia’s chief financial regulator that Citigroup broke the law when its traders bought and sold shares in a company that other Citigroup bankers were preparing a takeover bid for.

Judge Peter Jacobson also rejected the regulator’s claims that Citigroup’s Chinese Walls, designed to prevent leaks of sensitive information, were inadequate.

The Australian Securities and Investment Commission (ASIC), which launched the case, the first of its kind in the country, said it would study the judgment and decide whether to appeal.

Citigroup welcomed the ruling saying it “looks forward to continuing to work with ASIC and the industry to develop and uphold a well-regulated market for financial services in Australia."

The case centred on two Australian transport logistics companies and a single day's share trading.

Citigroup was advising one of the companies, Toll Holdings, on the possible takeover of the other, Patrick Corporation.

On August 19, 2005, the last business day before Toll launched a A$6 billion (£2.5 billion) bid for Patrick, Citigroup trader Andrew Manchee bought more than 1 million Patrick shares, driving up the target company’s share price, the court heard.

Mr Manchee's supervisor, Paul Darwell, then invited Mr Manchee to join him for a cigarette, and told him to stop buying Patrick shares. When he returned to the office, Mr Manchee sold 193,000 Patrick shares before trading closed.

ASIC alleged that Mr Darwell had assumed that Citigroup was advising Toll after hearing a comment from another executive, Malcolm Sinclair. Citigroup argued there was no evidence that key information had crossed from Mr Sinclair to Mr Darwell and then to Mr Manchee.

The regulator told the court that Mr Darwell and Mr Manchee's actions were clumsy attempts to resolve a conflict of interest, and that Citigroup did not have adequate measures to deal with the situation.

ASIC’s civil case did not seek charges against any individuals, but claimed Citigroup had breached Australian laws and should be fined.

Key to ASIC's case was its claim that Citigroup had a fiduciary relationship with Toll that obligated the bank to get permission from the company before trading in Patrick shares.

"However, the claims failed at the outset because the letter of engagement under which Toll retained Citigroup as its adviser specifically excluded the existence of such a relationship," the judge ruled.

The judge added that the insider trading charges failed because Mr Manchee could not be considered an officer of the bank under Australian law and that Citigroup's measures to prevent key information being communicated were adequate.

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